A bank is a financial institution often licensed by a government and having primary activities in borrowing and lending. Traditionally, banks have acted as payment agents, maintaining transactional accounts, more commonly known as deposit or lending accounts, for customers. To that end, banks frequently engage in the practice of lending. Lending is the provision of resources, such as the granting of a loan, by one party to another party where the second party does not immediately reimburse the first party, thereby generating a debt. Instead, the second party arranges to either repay the debt or return the resources at a later time, with interest. The interest helps to ensure that a lender will recover the initial loan amount along with a profit to cover costs and make the transaction reasonable for both parties. Along with credit unions and other money lenders, banks are often willing to extend a line of credit to individual customers and businesses in various forms that can include cash credits, term loans, demand loans, and any other similar lending relationship.
Along with payments for interest, typically, the lender will cap the amount of lending available to a particular borrower. This cap is referred to as a lending limit. A lending limit is the maximum amount of lending that a financial institution or other lender will extend to a debtor for a particular lending account. The lending limit attempts to ensure that a particular borrower will not over-borrow, thereby limiting the risk that the borrowed amount and interest owed will not be repaid by the borrower.
Lending can be lucrative for financial institutions. At times, however, predicting which borrowers are safe and which are risky is difficult. Lenders must accurately predict which percentage of lending accounts will not be paid in order to predict cash flow and prevent significant loss to the lender. Two of the most important aspects of lending that must be predicted are lateness and charge-offs, which are both forms of bad debt. Late accounts are those to which lending has been extended but not repaid on time. Charge-offs, on the other hand, are accounts that are irreparably damaged and are terminated by the lender to avoid further loss.
Forecasting losses due to anticipated bad debt is crucial to lenders as it serves some principle functions. First, accurate forecasting sets apart and declares accurate provisions for anticipated losses as part of statutory reporting guidelines. Second, forecasting aids the development of strategies and actions to manage lateness and improve collections and recovery. As a result, lateness and charge-off forecasting has become a key portfolio management activity.
One of the established techniques for loss forecasting is roll-rate-based forecasting. Currently, most financial institutions employ one of two types of lateness forecasting. The first method is known as a “multi-stage, one period” approach. This approach, which tracks the changes in the lateness profile of a portfolio from one period to the next, is useful in predicting the lateness profile only to the next period. The second method, which tracks a single account as it moves from one particular lateness stage across progressively worse lateness stages, is known as a “one stage, multi-period” approach. This method is able to track the change for one account from one lateness stage into other stages across multiple periods.
Unfortunately, these methods and others like them only allow for tracking changes from one period to the next or tracking a single account from a particular lateness stage to progressively worse lateness stages. In addition to tracking account migration simplistically, the typical roll-rate-based loss forecasting does not account for treatments. A treatment occurs when the lender provides an incentive to the borrower to make payments. Generally, a treatment strategy results in improving lateness amongst those who receive the treatment. In order to differentiate between accounts receiving treatments and those who do not, treatment accounts are referred to as “test” cases, while those accounts not receiving treatments are called “base” cases.
Therefore, systems and methods are needed that provide for improved lateness forecasting and lateness treatment analysis.